Download rank: 8 - Financial Secrecy Index

Narrative Report on Germany
Part 1: NARRATIVE REPORT
Rank: 8
Germany’s offshore financial centre:
Overview and background
Germany is a safe haven for dictators’ loot, the assets of organised
crime networks, and the proceeds of tax crimes and other illicit
financial flows from around the globe. In his September 2015
book Tax Haven Germany, TJN researcher Markus Meinzer
calculated that the amount of tax exempt interest-bearing assets
held by non-residents in the German financial system ranged
between €2.5 - 3 trillion as of August 2013.
Moderately
secretive
While there has been some recent progress with Germany’s
international treaty commitments and anti-money laundering
framework, there are still major loopholes and many
implementation deficits. Germany has shown negligent
enforcement of anti-money laundering rules, and it offers a
worrisome set of secrecy facilities and instruments, such as
bearer shares, which were outlawed or severely restricted long
ago in many ‘classic’ tax havens. Like many other OECD countries,
Germany does not sufficiently exchange tax-related information,
automatically or otherwise, with a multitude of other jurisdictions.
Many foreign-owned assets in Germany are held secretly through
elaborate structures spanning secrecy jurisdictions such as
Cayman Islands and Switzerland. And Germany’s willingness to
police its financial sector in these areas is woefully inadequate.
Germany has flown under the radar for too long: it is one of the
world’s bigger secrecy jurisdictions, and needs to be understood
as such.
History
Frankfurt, Germany’s modern financial powerhouse, was one
of the most important cities in the Holy Roman Empire, and for
much of that time it was the most economically powerful city
in the region. Its pre-eminence waxed and waned over ensuing
centuries but received a major boost in the late 16th Century when
Spanish soldiers plundered Antwerp, prompting many merchants
to flee to Frankfurt, and launching its first real financial boom
Secrecy
Score
31-40
41-50
Germany’s global scale weighting in the FSI is 6.0, meaning it has
a six percent share of global offshore financial services – though
not as large as the United States, United Kingdom or Luxembourg,
whose shares are respectively around 20 percent, 17 percent and
12 percent1. Germany’s secrecy score of 56 places it in the lower
mid-range of the secrecy scale, roughly equivalent to those of
Japan and (a much-improved) Luxembourg.
However, behind this moderate secrecy score lie areas of great
concern.
56
Chart 1 - How Secretive?
51-60
61-70
71-80
81-90
Exceptionally secretive
91-100
Chart 2 - How Big?
Germany accounts for slightly over 6 per cent of the
global market for offshore financial services, making
it a huge player compared with other secrecy
juridictions.
The ranking is based on a combination of its
secrecy score and scale weighting.
Read more
→ Full data
→ Germany on TJN Blog
→ Full Methodology
© Tax Justice Network 2015 - 23.9.2015
If you have any feedback or comments on this
report, please contact us at [email protected]
Germany
DENMARK
from 1585 (p308). Further inflows of French
Huguenots a century later helped cement the
city’s financial role.
Frankfurt suffered in the first half of the 20th
Century, and even in the early 1950s it was
probably eclipsed by Düsseldorf which was
closer to Germany’s industrial heartland, the
Ruhr. It only regained prominence from 1957,
when Germany’s central bank was set up with
its headquarters in Frankfurt. The same year
Dresdner Bank and Deutsche Bank also elected
to set up their headquarters there, marking the
financial centre’s rebirth.
After the Second World War, German banks,
faced with quite strong domestic regulations
in the Bretton Woods era, shifted substantial
operations abroad in the 1960s and 1970s,
particularly into the deregulated “Euromarkets”
– notably the City of London and Luxembourg
(see their respective offshore histories here and
here). Their London offices in particular, where
Deutsche and other German banks became
heavily involved in the recycling of Petrodollars
during and after the OPEC oil crisis, helped
them grow into global financial powerhouses,
spreading their activities worldwide and, as they
grew in strength, lobbying at home for financial
liberalisation too. This, in turn, helped attract
global banks and by the mid 1980s 40 of the
world’s top 50 banks had a presence in Frankfurt
and four fifths of foreign banks in Germany had
chosen Frankfurt as their base (p178 of European
Banks and the American Challenge). By the
1970s the high-growth Bretton Woods system
of relatively tight administrative controls over
cross-border financial flows and speculative
activity was being fatally undermined by the
unregulated Euromarkets, and German banks
became increasingly international in focus.
Yet the presence of strong industrial sectors in
Germany, such as the motor vehicle industries,
meant that there were always powerful counterlobbies able to resist the scale of dominance
by finance that has been achieved in other
countries such as the United Kingdom.
Germany fights against foreign tax havens
However, Germany also has a long record of
resistance against external tax haven activity.
This dates back till at least 1931 when Germany
issued a regulation to defend against tax erosion
by Liechtenstein foundations (p.263), which
were becoming increasingly popular among
German wealthy individuals. That same year,
German tax inspectors and intelligence officers
were caught in Switzerland trying to access data
held by Swiss bankers on German evaders.
The government’s “Tax Haven Report”
(“Steueroasenbericht”) of 1964 raised fresh
concern about these and other issues and
resulted in a new law in 1972 with a range
of measures aimed at stemming tax flight,
including new legislation on controlled foreign
corporations, aimed at curbing the effects of
corporate tax haven activity.
. . . but then starts to offer offshore attractions
in earnest
In the 1980s Germany’s role grew more
ambiguous when it openly began to enact
its own tax haven strategies, simultaneous
with attempts to defend against foreign tax
havens. For instance, in 1984 it abolished a
tax on state bonds levied on non-residents
(“Couponsteuer”), enabling tax evaders to
invest free of cost (and, by and large, risk) in
Germany’s financial system (p.264).
Meanwhile, attempts by the constitutional
convention after the War to create a central
tax administration had been thwarted by fierce
opposition from Allied powers. The result was a
fragmented tax administration accountable to
each of the now 16 Bundesländer (subnational
states of Germany), but not to the central
government. This has created a badly flawed
incentive structure: the 16 states bear the
costs of tax administration and tax audit, but
they have to pass on much of the extra tax
revenue to other states or central government.
This led to ruiniuous intra-German ‘tax wars’:
a race to the bottom inside Germany: not so
much on corporate tax rates themselves, but
on lax enforcement, auditing and the hiring
and staffing of local tax authorities. This kind of
laxity is another classic ‘tax haven’ staple.2
Yet there is some ‘competition” at the parish
level on corporate taxes. The municipalities
Germany
have some freedom to set a component of
the corporate tax, the “business tax” known
as Gewerbesteuer, which now represents
approximately half of the corporate tax rate on
average3.
This situation led to, among other things, a
rather comical situation in the tiny German
commune of Norderfriedrichskoog in the far
north near the Danish border: a commune with
fewer than 50 inhabitants which turned itself
into a miniature internal German corporate tax
haven by setting its rate for Gewerbesteuer at
zero.
By the early 2000s Norderfriedrichskoog had
become the place of incorporation to over 300
companies, including affiliates of Deutsche
Bank, Eli Lily & Co., Lufthansa and the German
utility E.ON. The commune hosted just a
handful of farmsteads and the commune was
treated to the regular spectacle of corporate
limousines trailing along muddy tracks to have
‘meetings’ in makeshift boardrooms built at
the backs of farms, in order to be able to have
just enough ‘presence’ and ‘substance’ to be
allowed to qualify for the Norderfriedrichskoog
tax rate. In 2004, as this situation began to get
out of hand, the laws were changed to enforce
a minimum tax rate of roughly seven percent
for the Gewerbesteuer, removing most of the
incentive to perform such tax gymnastics.
Even so, the minimum tax has reduced but
not eliminated the problem. Other parishes,
particularly in poverty-stricken Eastern
Germany, have sought to attract corporate
business through similar engagement in ‘tax
wars’; another example is Deutsche Börse’s
relocation from Frankfurt to nearby Eschborn
in 2010, cutting its tax rate sharply.
This ‘race to the bottom’ contributes to the
fact that Germany’s corporate tax revenues are
low, coming in at around 1.8 percent of GDP in
2012 according to OECD data, compared to 2.9
percent for the OECD average.4 This is despite
Germany having an average corporate tax rate
of around 30-33 percent (depending on the
state), far above the OECD’s average 26 percent
rate.
The German offshore financial centre today:
no classic banking secrecy but much else
Although Germany does not practice banking
secrecy like neighbouring Switzerland, criticism
by the FATF highlights concern about the use
of entities such as trusts, foundations and
Treuhand (a German speciality that can provide
strong secrecy). Information about beneficial
ownership of such structures, the FATF notes,
is very patchy and constitutes a major secrecy
loophole. While Germany addressed some
of the FATF’s concerns after 2010, problems
remain, as witnessed in FATF’s latest follow-up
report of 2014.
Germany has been very slow to join the OECD
/ Council of Europe Tax Convention for tax
information exchange - meaning that it has
failed to establish effective tax informationexchange agreements with many countries.
These factors – combined with a number of tax
exemptions for non-residents, notably on bank
deposit interest and on German government
bonds - have attracted large (and often illicit)
financial inflows. In its draft law for transposing
the new global automatic information exchange
standard dating from July 2015, Germany’s
maximum fine for wilful misreporting was
only 5000€, indicative of the lax enforcement
approach.
Germany
DENMARK
Low level of suspicious transactions reports
(STRs)
The FATF in 2010 also noted particular concerns
with Germany’s relatively low level of reporting
of suspicious transactions (STRs):
“For an economy the size of Germany‘s,
with a highly-developed financial
services sector which provides nearuniversal access to such services
for its resident population, the level
of suspicious transaction reporting
appears to be unusually low.”
Although reporting increased by more than
10% every year in 2011 and 2012, the figures
remain very low by international comparisons.
Furthermore, in 2010 the FATF noted a
surprisingly low number of STRs filed by
Frankfurt financial institutions in the year 2008
(p.172):
“The analysis of STR filings within
each state […] also show, prima facie,
some surprising results, particularly
in relation to the comparatively low
numbers submitted to the authorities
in Hessen, which is host to the country‘s
financial center of Frankfurt”.
While this suspicious underreporting in Hessen
decreased somewhat in 2011 and 2012, even
in those years both Bundesländer Bavaria and
Northrhine-Westfalia reported higher numbers
of STRs than Hessen, pointing to the likelihood
of low profile case reporting instead of serious
cases being brought to light through those
STRs.
Germany suffers many other shortcomings that
attract illicit and questionable financial flows
from abroad. For instance:
• Even tax evasion in particularly
serious cases (“Steuerhinterziehung in
besonders schweren Fällen”) is not a
predicate crime for money laundering
purposes in Germany. This implies
that banks may easily accept money
stemming from tax evasion, especially
if committed abroad.
• Bearer shares are a widely used
instrument in Germany even though they
obscure legal and beneficial ownership.
The FATF, in its 2010 evaluation of
Germany, decries the “Complete lack of
transparency over stock corporations
that issue their shares in bearer form,
and over private foundations.” German
limited companies are not sufficiently
transparent, though the extent of
transparency varies across the different
legal forms.
• There are no comprehensive public
statistics about the number of money
laundering and tax evasion convictions
in Germany. And the financial regulator
BaFin overwhelmingly outsources
supervision of the implementation
of money laundering rules to private
auditing firms, which raises serious
questions about conflicts of interest.
Similarly, Germany is more secretive
about the outcome of its freezing and
related anti-money laundering audits
than Switzerland and the United
Kingdom.
• The relatively low fines and low
number of convictions relating to
failures to prevent money laundering
by banks and other institutions point
to weaknesses in the policing of antimoney laundering rules.
• Germany played a key role in 20132014 in weakening EU rules to require
the public naming of offenders against
anti-money laundering rules, resulting
in many loopholes from the obligation
to publish the offenders. Despite
criticism by the FATF, supervision is still
highly fragmented among more than
100 different agencies, which often
lack the required capabilities to enforce
AML rules effectively.
• The German tax authorities have also
been criticised for their fragmented,
low-tech
and
under-resourced
approach to collecting tax, especially
from wealthy people, and for having
inadequate means to deal with large
taxpayers. In 2015, new data showed
how the two wealthy southern
Germany
Bundesländer of Bavaria and BadenWürttemberg have understaffed their
corporate audit departments, relative
to the German average.
• In 2013-2014, Germany played a
decisive blocking role in European
efforts to require transparency of
beneficial ownership of companies
across Europe. Because of Germany’s
intransigence, the hoped-for public
access to European-wide registers of
beneficial ownership information as
implemented in the 4th EU anti-money
laundering directive was watered down
so that it only applies after a “legitimate
interest test” has been performed.
• Furthermore, Germany signed a widely
criticised tax deal with Switzerland to
allow tax evaders and other criminals
to preserve their anonymity – though
at least the deal was eventually
overturned in the Bundesrat (upper
house) in late 2012.
• The German strategy of purchasing
data from whistleblowers (especially
from Swiss Banks) has allegedly led
to substantial additional tax revenue.
However, robust data on the results
of those purchases have never been
published by the German authorities
(p.14-16). More importantly, the
results of these data purchases, in
terms of criminal prosecutions, are
largely unknown. In the first and
largest “whistleblown” dataset on
the Liechtenstein LGT bank, it was
revealed that in Northrhine-Westfalia,
the largest German state, there has
not been a single prison term without
probation, and in the Swiss-Leaks
cases, there has not even been a single
public indictment. The data for the
rest of Germany is not available, but
it is very unlikely that prison terms (or
public indictments, respectively) have
been served in other German states.
By contrast, there is evidence that
German prosecutors are refusing to
open investigations even if confronted
with fully documented undeclared
foreign accounts. This contrasts with
much-criticised Greece, where there
has been at least a prosecution of a
Minister who manipulated the data
(chapter 6).
• The OECD has repeatedly criticized
German courts and judicial practices
for regularly entering into intransparent
deals (p.220).
• The influx of dirty money is facilitated
by a narrow set of predicate offenses
for money laundering. For instance, if
committed abroad, embezzlement of
public funds, taking undue advantages
or extortion are not predicate offenses
for money laundering, and therefore
would not expose a banker to the risk
of money laundering charges.
And all this brings large-scale questionable
flows
All this regulatory laxity have brought large
money laundering flows from criminal
organisations in countries such as Italy. But
there are also large illicit capital flows from
developing countries: for instance, Germany
froze billions of dollars’ worth of assets from
the ‘Arab spring’ countries such as Libya,
Tunisia or Egypt: raising the question of how
they managed to get to Germany unchecked.
Another striking example in recent years has
been the management of large-scale and
probably illicit Turkmen funds.
In many of such instances of going after
kleptocrats’ loot, however, Germany has
lagged behind other European partners such
as France or Switzerland, and has played rather
an obstructive role when the European Union
sought to set up European financial sanctions.
Meanwhile, German companies also often
play a questionable role abroad, supported by
these weak laws and enforcement by German
prosecutors. Until 1999, Germany allowed bribe
payments to be tax-deductible, becoming one of
the world’s last major economies to outlaw this
practice later on. With intensified investigations,
some large-scale corruption cases involving
companies such as Siemens were brought to
light. Only late in 2014, did Germany ratify the
UN Convention on Corruption – ten years after
Germany
Germany
it signed it, and later than most other countries
in the world. This came only after Germany
belatedly tightened its lenient laws on bribery
of Members of Parliament.
- Holtfrerich, C.L (1999), Frankfurt as a
Financial Centre: From medieval trade fair
to European banking centre, C.H.Beck:
Munich.
Also German banks have a worrisome record of
supporting tax evasion and money laundering
activities abroad. For instance, Deutsche
Bank Mauritius was involved in handling part
of a US$20 million bribery scandal in Kenya,
and various German banks have been facing
investigations for breaches of anti-money
laundering rules in places as diverse as the USA,
Dubai and India (pp. 87-90).
______________________________________
According to the latest report by the Financial
Action Task Force (FATF) in 2010, Germany
hosted over US$1.8 trillion in deposits by
non-residents and boasted 3,400 financial
institutions of various kinds, mainly commercial
banks, savings banks and co-operative banks.
In his book Tax Haven Germany, TJN researcher
Markus Meinzer calculated that the amount
of tax exempt interest bearing assets by nonresidents in the German financial system
ranged between €2.5 trillion to over €3 trillion
in August 2013.
Read more:
- Full data for Germany
- Germany on TJN Blog
- Full Methodology
- For more background on the role played by
Germany in money laundering and tax evasion,
see Markus Meinzer’s 2015 book on Germany as
a tax haven, entitled “Steueroase Deutschland”
(currently only available in German.)
- See the TJN Deutschland study on Germany
as a secrecy jurisdiction, here (in German
language)
- Baltilossi, Sand Cassis, Y (2002), European
Banks and the American Challenge: Competition
and cooperation in international banking
under Bretton Woods, Oxford University Press:
Oxford.
- Global Financial Integrity (March 2010),
Privately held, non-resident deposits in
secrecy jurisdictions, available at http://www.
gfintegrity.org /storage/gfip/documents/
reports/gfi_privatelyheld_web.pdf
Research by Washington-based Global Financial
Integrity from 2010 identified Germany (p1) as the
world’s fifth largest holder of private, non-resident
deposits – a key marker of offshore activity.
2
Since 2006, the central tax administration office
(Bundeszentralamt für Steuern, BZSt) formally
has a right to initiate a tax audit at a company
(“Bundesbetriebsprüfung”), when Federal-level
officers may accompany state officers for an audit.
However, the central tax office lacks a database
to identify companies, and the current central
government has taken the position that it does not
have the right to initiate audits: only to accompany
ones initiated by the states. Confidential documents
from the national audit office in 2011 and 2014,
seen by TJN, reveal that tax audits have almost never
been initiated by BZSt.
3
The parishes are allowed to set the rate for the
Gewerbesteuer as low as seven percent. Combined
with the federal corporate tax rate of 15% this would
result in a minimum tax rate of roughly 22%. On
average, however, the combined tax rate is around
30%.
4
https://stats.oecd.org/Index.aspx?DataSetCode=REV
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Germany
Part 2: Germany’s secrecy score
TRANSPARENCY OF BENEFICIAL OWNERSHIP – Germany
1
Banking Secrecy: Does the jurisdiction have banking secrecy?
Germany partly curtails banking secrecy
2
Trust and Foundations Register: Is there a public register of trusts/foundations, or are trusts/
foundations prevented?
Germany does not disclose or prevent trusts and private foundations
3
Recorded Company Ownership: Does the relevant authority obtain and keep updated details of the
beneficial ownership of companies?
Germany partly maintains company ownership details in official records
Secrecy Score
Germany - Secrecy Score
KEY ASPECTS OF CORPORATE TRANSPARENCY REGULATION – Germany
4
Public Company Ownership: Does the relevant authority make details of ownership of companies
available on public record online for free, or for less than US$10/€10?
Germany does not require that company ownership details are publicly available online
5
Public Company Accounts: Does the relevant authority require that company accounts are made
available for inspection by anyone for free, or for less than US$10/€10?
Germany does not require that company accounts be available on public record
6
Country-by-Country Reporting: Are all companies required to publish country-by-country financial
reports?
Germany partly requires public country-by-country financial reporting by some companies
EFFICIENCY OF TAX AND FINANCIAL REGULATION – Germany
7
Fit for Information Exchange: Are resident paying agents required to report to the domestic tax
administration information on payments to non-residents?
Germany does not require resident paying agents to tell the domestic tax authorities about payments
to non-residents
8
Efficiency of Tax Administration: Does the tax administration use taxpayer identifiers for analysing
information efficiently, and is there a large taxpayer unit?
Germany does not use appropriate tools for efficiently analysing tax related information
9
Avoids Promoting Tax Evasion: Does the jurisdiction grant unilateral tax credits for foreign tax
payments?
Germany partly avoids promoting tax evasion via a tax credit system
10
Harmful Legal Vehicles: Does the jurisdiction allow cell companies and trusts with flee clauses?
Germany partly allows harmful legal vehicles
INTERNATIONAL STANDARDS AND COOPERATION – Germany
11
Anti-Money Laundering: Does the jurisdiction comply with the FATF recommendations?
Germany partly complies with international anti-money laundering standards
12
Automatic Information Exchange: Does the jurisdiction participate fully in multilateral Automatic
Information Exchange via the Common Reporting Standard?
Germany participates fully in Automatic Information Exchange
13
Bilateral Treaties: Does the jurisdiction have at least 53 bilateral treaties providing for information
exchange upon request, or is it part of the European Council/OECD convention?
As of 31 May, 2015, Germany had at least 53 bilateral tax information sharing agreements
complying with basic OECD requirements
14
International Transparency Commitments: Has the jurisdiction ratified the five most relevant
international treaties relating to financial transparency?
Germany has ratified less than five of the most relevant international treaties relating to financial
transparency
15
International Judicial Cooperation: Does the jurisdiction cooperate with other states on money
laundering and other criminal issues?
Germany partly cooperates with other states on money laundering and other criminal issues
56.36%
Germany KFSI-Assessment
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Notes and Sources
The ranking is based on a combination of its
secrecy score and scale weighting (click here to see
our full methodology).
The secrecy score of 56 per cent for Germany has
been computed by assessing its performance on 15
Key Financial Secrecy Indicators (KFSI), listed on the
left. Each KFSI is explained in more detail, here.
Green indicates full compliance on the relevant
indicator, meaning least secrecy; red indicates noncompliance (most secrecy); and yellow indicates
partial compliance.
This paper draws on data sources including
regulatory reports, legislation, regulation and news
available as of 31.12.2014 (with the exception of
KFSI 13 for which the cut-off date is 31.05.2015).
Full data on Germany is available here: http://www.
financialsecrecyindex.com/database/menu.xml
All background data for all countries can be found
on the Financial Secrecy Index website: http://
www.financialsecrecyindex.com
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